FEMA to build on “cornerstone” NFIP flood reinsurance placement

10th March 2017 - Author: Artemis

The Federal Emergency Management Agency (FEMA) will seek to build on its “cornerstone” flood reinsurance placement in order to better protect the National Flood Insurance Program (NFIP), while shifting more of its risk to the private sector.Speaking at a hearing in front of the U.S. House of Representatives Housing and Insurance Subcommittee yesterday, Roy Wright, deputy administrator of the Federal Insurance and Mitigation Administration unit of FEMA, explained that the reauthorisation of the NFIP is key to the stability of U.S. property and mortgage markets and that privatisation will play a role.

The privatisation of U.S. flood insurance risk is a hot political topic currently, with this hearing in the U.S. House giving representatives a chance to quiz FEMA on its plans for the NFIP and the status if U.S. flood insurance reform.

Separately, a bill that failed to make it through the Senate in 2016, the Flood Insurance Market Parity and Modernization Act, has been reintroduced which seeks to make it easier for flood risk to be privatised.

Right now though, the need for a timely multi-year reauthorisation of the NFIP is the top priority of FEMA and the U.S. House of Representatives Housing and Insurance subcommittee, according to speakers yesterday.

Blaine Leutkemeyer, the U.S. Representative for Missouri’s 3rd congressional district, said that currently the “taxpayers are the reinsurers of the NFIP” and he urged FEMA to use more private market reinsurance protection to alleviate the burden on taxpayers.

“Reinsurance is the most important thing we can do,” he said, adding that it will get taxpayers off the hook for major losses and enable the flood insurance program to be better controlled.

Wright, of FEMA, called the reinsurance placement a “cornerstone placement that FEMA will be building upon going forwards.”

He said reinsurance is “an important tool” that can help FEMA lower the burden of the NFIP, but added that he doesn’t believe reinsurance alone is the solution for managing the NFIP’s liabilities.

Reinsurance capacity is clearly a key piece of the NFIP privatisation, as any shift to push risk into the portfolios of private insurers will also require reinsurance support.

FEMA itself looks set to build on its first placement, likely revisiting the reinsurance market to acquire greater amounts of coverage at renewals to come, although attachment levels of the program will be dictated by market pricing and the appetite of major reinsurers to take on more of this risk.

In the current market environment it is almost certain FEMA could increase the size of the placement significantly, but the real progress may begin once private insurers are underwriting more U.S. flood risk and ceding it out through their own reinsurance programs, including to the capital markets.

If the NFIP privatisation agenda can be progressed and a significant portion of its policies were taken up by private insurance markets, the opportunity for reinsurers and capital markets will not just be in backing FEMA’s NFIP placement directly but also in backing those insurers underwriting flood risk privately.

Catastrophe bonds remain an option, with legislators certainly aware of the potential appetite in the capital markets to take a slice of the NFIP reinsurance program in a securitised form. However at this time it seems more probable that FEMA upsizes its reinsurance placement and private insurers start to take more of the risk out of the NFIP in the near-term.

Of course some ILS fund managers may look to access the NFIP’s risk more directly, as and when privatisation allows. With ILS managers backing fronted catastrophe exposed property insurance in coastal areas, any new source of flood exposed property risk may well be attractive to this model as well, ultimately bringing some of the risk to the capital markets.

Wright agreed that there is a portion of the NFIP’s risk that can be privatised right now, but he said that he doesn’t feel the whole market could be privatised as it is today.

He said that FEMA recognises the interest that private insurers are showing in taking on some of the NFIP’s risk, although it seems likely that the government will remain a backstop for the most at risk and uninsurable properties.

Better sharing of NFIP risk data was called for during the Hearing, with Wright explaining that there is “No more effective risk communication tool than a pricing signal.”

This could be the key in unlocking the NFIP to privatisation; the availability of data, advanced risk models, sophisticated underwriting methodologies and plenty of reinsurance capital support.

NFIP policies suffered $4.2 billion of losses in 2016, as events such as the Louisiana floods ensured the debt it owes to government continued to rise. Now sitting at $24.6 billion, this debt remains a sticking point and some representatives at the hearing called for it to be forgiven, to enable the NFIP to be fully reformed and privatised.

It costs the NFIP around $400 million a year to service this debt, and Wright said that the NFIP was unlikely to be able to pay the debt off in its current form, without an exponential rise in policyholder premiums.

That is what everyone wants to avoid, the potential for U.S. flood insurance policies to become even less affordable and it seems that without some serious political will any steps taken may be more of a downsizing than a wholesale privatisation of flood risk.

However the political debates pan out the reinsurance and capital markets will stand ready to support FEMA’s desire to build on its cornerstone NFIP flood reinsurance placement.

Through the growth of that reinsurance placement, plus the gradual privatisation of flood insurance policies with the support of private insurers, reinsurers and the capital markets, maybe the odd catastrophe bond or two, the NFIP can certainly be downsized, perhaps significantly and at the very least meaningfully.